City Analysts Warn Labour Party Poised for £15bn Tax Overhaul

Financial experts at a prominent City institution have cautioned that should the Labour Party secure a significant majority in the upcoming general election, Shadow Chancellor Rachel Reeves may orchestrate a substantial £15bn tax reform come autumn. This sweeping fiscal adjustment is anticipated to target pensions, capital gains, and inheritance, according to analysts at the esteemed investment bank Citi.

Benjamin Nabarro, Citi’s chief UK economist, posits that Reeves is likely to acquiesce to mounting pressure for increased public expenditure. Moreover, the Labour Party might extend what has been termed a ‘stealth raid’ on workers’ pay packets, should they emerge victorious at the polls.

In his analysis, Nabarro asserted that Labour would “ultimately tax and spend more than the current baseline”. He further cautioned that the “rot” of sluggish economic growth in the United Kingdom had become deeply entrenched, exacerbated by a wave of post-crisis regulatory measures.

The Citi report suggests that the forthcoming quinquennium is likely to usher in a “painful, but also probably unavoidable” trajectory towards higher taxation under a Labour administration. This stark forecast underscores the fiscal challenges that may lie ahead for the UK economy, regardless of the electoral outcome.

Nabarro identified several potential avenues for revenue generation that the Labour Party might explore. Chief among these are reductions in tax relief on pension contributions, modifications to inheritance tax regulations, and adjustments to capital gains tax. These measures alone could potentially raise up to £8bn annually, a significant sum that has fuelled widespread concerns about Ms Reeves’ intentions regarding retirement savings.

“We therefore expect some further tightening in the autumn,” Nabarro elaborated. “Here, the most likely revenue candidates could be changes in pension contribution relief after Rachel Reeves ruled out changes in the lifetime allowance, reform to capital gains, and changes to inheritance tax. These are in addition to revenue changes in Labour’s manifesto.”

It is worth noting that Ms Reeves has consistently declined to rule out an increase in capital gains tax, although she has insisted that Labour has “no plans” to raise this particular levy. This careful phrasing has left room for speculation about potential future adjustments to the tax regime.

Throughout the election campaign, Labour has categorically ruled out increases to income tax, National Insurance contributions, and Value Added Tax (VAT). However, senior party figures have repeatedly failed to dismiss the possibility of other tax hikes, leaving voters and analysts alike to ponder the full extent of Labour’s fiscal strategy.

Nabarro’s analysis goes further, suggesting that Labour may be contemplating additional tax rises beyond those already mentioned. “Wider reforms – such as changes to council tax – will probably take longer,” he noted. “We would not rule out changes to various tax thresholds – including income tax. But in total, we think a total tightening of £15bn in an October budget is not an unreasonable base case here.”

It is pertinent to note that the current Chancellor, Jeremy Hunt, has already implemented a six-year freeze on income tax thresholds. This measure is projected to push millions of people into higher tax bands by the close of the decade, effectively increasing the tax burden on a significant portion of the population without explicitly raising tax rates.

The Citi analysis comes in the wake of a leaked recording that has sent shockwaves through political circles. The recording purportedly reveals that Labour is contemplating an inheritance tax raid to “redistribute” wealth should they ascend to power. Darren Jones, the shadow chief secretary to the Treasury, suggested that increased death duties could be employed as a mechanism to address “inter-generational inequality”.

When questioned about this potential policy on Wednesday, Pat McFadden, Labour’s national campaign coordinator, did not categorically rule out such a move. He told Good Morning Britain: “From that moment we’ve said that nothing in our manifesto requires us to raise any taxes beyond the very specific things that we’ve set out in the manifesto, and that remains the position on this as with anything else.” This carefully worded response has done little to quell speculation about Labour’s true intentions regarding inheritance tax.

In response to these revelations, Bim Afolami, the economic secretary to the Treasury, issued a stark warning: “Labour are plotting a hidden tax raid that is not in their manifesto and if they are given a super-majority on Thursday they will be free to impose it.” This statement underscores the growing concern among Conservative ranks about the potential fiscal implications of a Labour victory.

Interestingly, the Citi report also noted that even a Conservative majority government would likely involve “some [fiscal] tightening”, albeit occurring “in fits and bursts”. This observation suggests that regardless of the election outcome, British taxpayers may face increased fiscal pressure in the coming years.

Nabarro painted a sombre picture of the UK’s tax and spending outlook, describing it as “dark”. He added that Labour would also face pressure to increase defence spending, further straining Whitehall budgets. “Demand for additional spending remains significant,” he explained. “In recent years, performance indicators for the public sector have deteriorated. Metrics such as waiting times for A&E, elective surgery, or the gap between reported offences and prosecutions have all widened.”

The economist went on to highlight the changing landscape of national defence spending: “Other historical supports such as trend reductions in defence spending are also likely to reverse – we think any government will now likely increase defence spending to 2.5pc GDP by 2030.” This projection underscores the multifaceted nature of the fiscal challenges facing the next government, regardless of its political persuasion.

Citi’s analysis also drew attention to the broader economic context, warning that the end of an era characterised by ultra-low interest rates and cheap public borrowing for the UK would likely keep borrowing levels – and consequently, Britain’s debt burden – high. Nabarro succinctly summarised this challenge: “The challenge is adjustment to this new fiscal reality is only now beginning.”

In a parallel development, Goldman Sachs has issued a warning that Labour’s proposed tax on private schools could potentially push up inflation. The investment bank also suggested that Labour’s pledge to introduce a “genuine living wage” might result in interest rates remaining higher for longer than previously anticipated.

This cautionary note comes at a time when price rises have only just returned to the Bank of England’s 2pc target, highlighting the delicate balance that must be struck between fiscal policy and inflation management.

“Labour’s fiscal policies would also likely have a mechanical impact on inflation via the proposed introduction of VAT on private school fees,” Goldman Sachs stated in a note to clients. The bank elaborated: “Faster demand growth and the possibility of stronger wage growth in April 2025 – depending on how Labour’s living wage policy takes shape – point to risks of slightly firmer inflationary pressures.”

Regarding the potential implications for monetary policy, Goldman Sachs noted: “The implications for the [Bank of England] would likely be limited, but with risks of slower rate cuts if Labour delivered a sizable increase in the living wage.”

As of the time of writing, the minimum wage for individuals aged 21 and over stands at £11.44 per hour. While Labour has yet to specify a target figure for their proposed “genuine living wage”, it is worth noting that the Living Wage Foundation has set its recommended hourly rate at £12 outside London and £13.15 within the capital.

In conclusion, as the UK approaches a pivotal general election, the potential fiscal implications of a Labour victory are coming under intense scrutiny. While the party has made efforts to reassure voters about their tax plans, analysis from respected financial institutions suggests that significant changes to the UK’s tax landscape may be on the horizon. As always, the true impact of any new fiscal policies will only become clear in the fullness of time, leaving voters, economists, and policymakers alike to watch developments with keen interest in the months and years to come.